Breakout Criteria

There are various factors that I will consider when looking for potential breakout trades, but one of my favorite patterns is when you get a combination of a moving average cluster and a sideways trading range.

In other words, I like to see the 20, 50, 100 and 200-period exponential moving averages all trading close together because this indicates a period of consolidation and indecision, and is often the pre-cursor to a big breakout.

Similarly, I like to see the price trading in a consistent trading range close to these moving averages because this makes it easier to detect a breakout, and gives you a natural entry point because you just enter a long position when the price closes above this range or a short position when the price closes below this range.

I have just found that both of these criteria are present on the daily chart of the EUR/JPY pair, so this could potentially develop into a good trading opportunity:

Trading Opportunity

What I like about this set-up is that the trading range is currently very narrow, which is always a good thing because you can potentially make more profits, and can make your stop losses smaller if you place them just outside this range.

The only real danger is that you sometimes get a few false breakouts before the big one, which could happen here, but there is still the potential for the price to move at least 200 points in either direction.

A breakout to the upside could see the price retest its highs from last month at around 133.00, with 132.00 as a first target and potentially a price to close half the position and move the stop loss up to break-even.

A breakout to the downside, meanwhile, would see 128.00 as the first target because this was a recent support level, and if the price breaks through this level, then 126.00 could easily be attained.

It should always be pointed out that breakouts are not always profitable because you sometimes get false moves, and I am not certainly not recommending any trades. These are just my own thoughts and opinions.

The key to success with any strategy is to keep your losing trades small, and let your winning trades run, and this applies to breakout strategies as well.